Apr 18 2012
There are different types of mortgage insurance available in the market and private mortgage insurance (PMI) is one of the most common types of mortgage insurance that people often complain about. Private mortgage insurance often requires the homeowners pay a heavy premium, but even then it doesn’t provide required coverage that most homeowners look for. In fact, it provides almost no protection to the borrowers.
There is another type of mortgage insurance that pays off only in the event the borrower dies. For this type of mortgage insurance, a borrower usually needs to pay less. Homeowners generally avoid this type of insurance as they can get same sort of and sometimes even better death benefits through a life insurance policy.
Why should you buy mortgage insurance?
A private mortgage insurance (PMI) policy protects the lender instead of the borrower. Still homeowners often need to buy such insurance as the lenders require them to buy. The lenders generally require the borrowers, who make less than 20% of the appraised value of the property as down payment. The less the borrowers put down, the more risks to the lenders. This is the reason why the lenders need the borrowers to buy mortgage insurance and protect them against a mortgage default.
Being a borrower, you don’t get any scope to choose any mortgage insurance provider and also negotiate on the rate of premium. The lender is likely to do this on behalf of you. If you take out a home loan, which surpasses 80 percent loan-to-value, you’re much likely to buy mortgage insurance. The mortgage insurance will pay your lender, should you fail to pay the premiums and your house needs to be foreclosed.
Federal Housing Administration or FHA requires the homebuyers to pay additional charges apart from the upfront premium. The additional fees charged by FHA may include monthly premiums comprising principals, interests and also taxes.
Can you cancel mortgage insurance?
If the value of your home equity increases by at least 20 percent, either by paying off your loan or by appreciation, you can cancel your mortgage insurance. However, you can’t do this unless the lender gets the proof that the position of your home equity is secured and value has been appraised by at least 20 percent. The lender may also require you to pay for independent appraisal. You may not get a voice in selecting the appraiser or the money that the appraisal may cost you.
In case of an FHA mortgage, you need to pay off 78% of the actual sales price of the property, toward the mortgage. Even if the equity value is appraised, then also you need to lessen the actual principal due.
How can you stop paying for PMI?
There are some effective ways through which you may avoid paying for your PMI.
- Being a veteran, you can opt for taking out a VA home loan that doesn’t require you to buy PMI.
- Pay at least 20% of the value of the property as down payment.
- Pay higher rate of interest.
- Take out a combination home loan of 80 / 10 / 10. It combines 10 percent down payment, 80 percent first home loan and 10 percent second home loan or mortgage.
- Apply for HomePath home loan provided by Fannie Mae. However, you need to meet some criteria to qualify for such type of mortgage.
When it comes to mortgage insurance, there is no guarantee that you can take for granted. Your mortgage may or may not contain mortgage insurance, should the equity is less than 20 percent as your lender can pay for mortgage insurance even without a verbal or written consent from you.
Author’s bio: Tim Scott is a senior insurance advisor at BestInsLeads.com. He writes for different online insurance journals and portals.